XBRL : The Future of Financial Reporting

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*(This article has been published by the Guwahati Branch in their Souvenir for the National Conference of ICAI held at Guwahati, Assam on 16-17 December 2011.)

Visit http://canirmalg.wordpress.com/xbrl/ ‎for my conversion tool on XBRL and other files.

–Start–

A. Introduction to XBRL

XBRL is the buzz word today in our professional fraternity. Why not, ‘The Companies (Filing of documents and forms in Extensible Business Reporting Language) Rules, 2011’ has mandated filing of annual reports of specified class of companies using XBRL and as always, something new, a jargon probably never heard before, has been thrown at us to comply with.

In the following paragraphs, we try to unravel this mystery and solve the puzzle –answer a few basic questions – Why, What, Who, How and Where – put together these fragments to frame a picture called XBRL.

1.    Why we need XBRL?

Every entity, commercial or otherwise, is required to prepare and present one or more financial reports to showcase its activities or operations and its financial standing. However, the Financial Reporting model today involves manual processes and is rather disjointed.

Even in the era of advanced automation and Electronic Data Processing, applications or computer servers seldom interact outside their periphery, because different applications have different data structures and generate reports in closed formats (word, excel or pdf) i.e., to say, the output of one application is not automatically input in another application for further processing. This gives rise to manual extraction and re-entry of data which is laborious, error prone and adds no value.

The users of financial information – regulatory authorities, stakeholders, lenders, etc. have differing requirements. This leads to a disjointed system of financial reporting requiring the preparer to prepare multiple financial reports for different users.

Consequentially, more time & energy is spent on data mining and data gathering and less is spent on data analytics. With XBRL, we intend to reverse this.

2. What is XBRL?

To begin with, XBRL is an abbreviation for eXtensible Business Reporting Language.

XBRL is an Open Standard XML based language for electronic communication of business and financial information and on the Internet.

However, XBRL is a more powerful and flexible version of XML which has been defined specifically to to meet the requirements of Business & Financial information.

Conversion of Financial Information into XBRL involves tagging of Individual elements or item in the financial report (Concepts) for their electronic dissemination.

These concepts are defined in a Taxonomy based on a Common Accounting Framework (say, Indian GAAP, IFRS or US GAAP, etc.). Thus, Taxonomy is basically a Dictionary of financial reporting terms or concepts. Since national jurisdictions have different accounting regulations and accordingly separate Taxonomies are developed for different reporting purposes such as Indian GAAP Commercial & Industrial (C&I), IFRS, Bank Regulatory reporting, etc.

XBRL is an Open Standard and is thus free of all licenses and royalty. It is also software and application independent. However, here lies the catch – basically, the Taxonomy or the Data Standard is free – the tools and applications to convert and / or view the Financial Report are developed by proprietary software vendors and are accordingly subject to a license fee.

XBRL is extensible. Each entity’s business operations have unique aspects of reporting. An EXTENSION TAXONOMY allows a company to create and customize concepts and elements for their particular reporting practices. Extension taxonomies import then build on, or “extend” the core reporting taxonomy.

This characteristic of extensibility of XBRL provides it with the much needed flexibility and adaptability to differing accounting environments. Without extensibility, XBRL would have been a mere standard chart of accounts.

 

Figure 1 – Explaining the Extension Taxonomy

What XBRL is NOT!

XBRL is neither an Accounting Standard nor a computer program. It is also not a limited chart of accounts or a proprietary information standard or software.

Simply stated, XBRL is a language for transmitting information.  It must accurately reflect data reported under different standards and regulations – it does not change them.

3. Who develops XBRL?

The origins of XBRL lie in the proposal of Mr Charles Hoffman, AICPA to use XML (eXtensible Mark-up Language) for electronic reporting of Financial Information.

XBRL is being developed by XBRL International Inc. (XII). XII is a Not for Profit consortium of Regulators, Government Agencies, Accountancy Institutes, Leading Corporates, IT & Financial & Professional Services Companies.

XBRL International Inc. (XII) is a Consortium similar to how the Universal Product Code (UPC) Seal (commonly ‘Bar Code’) was developed… and BAR CODING HAS REVOLUTIONISED PRODUCT DISTRIBUTION… WHAT WILL XBRL DO TO FINANCIAL REPORTING?

Well, we’ll answer this question after we first learn how XBRL works…

4. How XBRL Works?

A Simple Explanation

The idea behind XBRL, eXtensible Business Reporting Language, is simple. Instead of treating financial information as a block of text – as in a standard internet page or a printed document – it provides an identifying tag for each individual item of data. This is computer readable. For example, company net profit has its own unique tag. This enables reporting software to collect relevant data and place it in the appropriate financial reports.

XBRL “Tags” can be thought of as a “Bar Code” system for financial information, allowing financial statements to be read and understood by a computer. XBRL will do for Financial & Business Reporting what Bar Code has done for Product Distribution.

5. Benefits of XBRL

The introduction of XBRL tags enables automated processing of business information by computer software, cutting out laborious and costly processes of manual re-entry and comparison. Computers can ACCESS, EXTRACT AND PROCESS XBRL data “intelligently”: they can recognize the information in a XBRL document, select it, analyze it, store it, exchange it with other computers and present it automatically in a variety of ways for users. XBRL greatly increases the speed of handling of financial data, reduces the chance of error and permits automatic checking of information.

Probably, the best explanation of benefits derived from the use of XBRL lies in the following words of Mr John Connors, Chief Financial Officer, Microsoft – “Through Internet delivery, XBRL will also provide analysts and investors with extensible financial data to make informed decisions about the company. We see XBRL as not only the future standard for publishing, delivery and use of financial information over the Web, but also as a logical business choice.”

6. XBRL – Around the World..!

XBRL is growing quickly around the world with increasing participation from individual countries and international organisations. At present, XBRL International is comprised of 23 Established jurisdictions and 3 Provisional jurisdictions which represent countries, regions or international bodies and which focus on the progress of XBRL in their area.

B. XBRL in INDIA.

1.  Introduction

XBRL India, a company registered under section 25 of the Companies Act, 1956 is the Indian Jurisdiction of XBRL International Inc. (XII).

The main objective of XBRL India is to promote and encourage the adoption of XBRL in India as the standard for electronic business reporting in India.

XBRL India has overseen the development of the Taxonomy for Indian GAAP Commercial and Industrial and Indian GAAP Banking taxonomy. Separate taxonomies for insurance and power sector are under development.

XBRL Projects in India

RBI has already implemented Capital Adequacy Reporting by Banks as per Basell II norms in XBRL.

MCA has mandated the e-filing of annual reports in XBRL format for specified classes of companies.

SEBI has an under development project – “Super-D” for XBRL filing by all Listed Companies and Mutual Funds in India.

The Central Electricity Regulatory Commission (CERC) is also developing an XBRL based Regulatory Information Management System (RIMS).

2. The MCA21 Mandate

The Ministry of Corporate Affairs (MCA) envisages a two-phase approach for implementation of XBRL based reporting of Company Annual Reports.

In the first phase beginning April 1, 2011, select class of companies noted below are required to file their annual reports using XBRL.

They are:-

• All Listed Companies & their Indian Subsidiaries
• Companies with Paid up Capital >= 5 crores
• Companies with Turnover >= 100 crores
• However, Banking, NBFC, Insurance & Power Sector companies are excluded.

In the second phase beginning April 1, 2012 ALL COMPANIES(Including Banking, NBFC, Insurance & Power Sector Companies) are required to file their annual reports using XBRL.

Further, the existing Commercial & Industrial (C&I) Taxonomy to be UPDATED & MAINTAINED to conform to REVISED SCHEDULE VI and new Taxonomy(ies) for Banking, NBFC, Insurance & Power Sector Companies are under development.

(Source: http://xbrl.icai.org/)

 

Figure 2 – MCA21 XBRL Filing Process

3. Role of Finance Professionals in XBRL Filings.

XBRL provides an exciting opportunity to finance professionals in the following fields:

1. Compliance with the MCA Regulatory environment;
2. Impact assessment of XBRL on Management Information Systems;
3. Designing extension Taxonomies; and
4. Mapping (Tagging) line items in accounts masters with the XBRL Taxonomy.
5. Certification of XBRL Financial Statements

The responsibility of the practitioner in carrying out a certification of XBRL financial statements is to certify that the said XBRL financial statements fairly present, in all material respects, the audited financial statements of the Company from which such XBRL financial statements have been prepared, in accordance with the taxonomy prescribed by MCA.

In this regard, the ICAI has issued a Guidance Note on Certification of XBRL Financial Statements. The said guidance note, inter-alia, entrusts the practitioner to ensure completeness, accuracy, mapping and structure of the XBRL financial statements.

C. Conclusion

Businesses and accountants gain significant benefits through easier preparation, analysis and communication of information. These benefits include cost savings, greater efficiency, and improved accuracy and reliability of information.

XBRL is the emerging global standard of Financial Reporting. XBRL will change the way we communicate with the regulators in the years to come.

– End –

*Download This Article  on XBRL – The Future of Financial Reporting – PDF

*(This article has been published by the Guwahati Branch in their Souvenir for the National Conference of ICAI held at Guwahati, Assam on 16-17 December 2011.)

A DISCUSSION PAPER (DRAFT) TO PROVIDE MEANINGFUL INFORMATION IN THE PASSBOOK/ ACCOUNT STATEMENTS

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EXECUTIVE SUMMARY

1.      Bank statements, at present, lack uniformity and do not necessarily depict or describe properly the transactions recorded therein unless supporting documentation viz., pay-in-slips (Deposits) or noting’s in cheque books (withdrawals) are referred to.

2.      This is on account of Core Banking Solution (CBS) of different banks capturing information from different field tags of the transaction voucher created in the CBS of the bank.

3.      The KYC data (principally Name of the Account Holder) of the customer is available in electronic format – in the CBS – data servers of the respective bank branches. Further, it is also shared in most cases for their inter-bank transactions relating to their customers.

4.      Bank statements will be intelligible (meaningful and easy to understand) – if they capture and record – the name of the remitter or beneficiary – as the case may be.

5.      This can be achieved by modification / updation in the Core Banking Solution of the Banks – to capture the appropriate field tag – principally the name of the remitter or beneficiary - in case of transfer of funds.

6.      The project is likely to add VISIBILITY to the Audit Trail inherent in banking transactions which will assist in prevention of money laundering and audit and investigation of cases of tax evasion as well as considerable savings in terms of man-hours devoted in reconciling bank statements.

7.      The proposal is explained in depth and particularly covering all aspects of the bank statements and matters incidental thereto in this draft discussion paper. The draft may be required to be modified based on inputs / feedback received from all stakeholders.

A.        OBJECTIVE

This Discussion Paper envisages

TO      make Bank Statements INTELLIGIBLE (MEANINGFUL and UNDERSTANDABLE) without reference to supporting documents and thereby add VISIBILITY to the AUDIT TRAIL inherent therein.

BY      TRANSFER & CAPTURING OF THE KYC DATA – NAME OF THE ACCOUNT HOLDER – ELECTRONICALLY along with the existing process of recording banking transactions

AND    matters incidental thereto.

 B.        INTRODUCTION – THE PRESENT SCENARIO

Banks play a vital role in our everyday life – be it an individual, a small trader, an SME or a large corporate house – everyone receives and pays – money through the services of Banks.

Consequently, bank statements –in pass book or by way of account statements in paper mode or any electronic mode need to depict & describe properly the transactions entered into by the customer.

Further, the August 2009 issue of The Banking Codes and Standards Board of India – Clause 8.1.1 para Statements and sub-clause (e) mandated Banks to – “We will ensure that entries in your pass book / statements are brief and intelligible.”

In a significant effort in this direction, the Reserve Bank of India vide Circular RBI/2008/09/426 dated April 8, 2009 advised banks to furnish the name of the remitter and beneficiary in the pass book / account statement to the customer , however, only with respect to RTGS/ NEFT transactions.

Invariably, the present state of bank statements is rather dismal with no uniformity on the information provided to customers in these account statements / pass books and entries therein don’t make sense without reference to supporting documents viz., Pay-in Slips (for Deposits) and Noting’s in Cheque books (for Withdrawals). This is on account of the Core Banking Solution of different banks capturing information from different field tags of the Transaction Voucher created by the Bank (System).

This leads to reconciliation issues and the Bank Statements are not meaningful unless and until the supporting documentation is referred to viz., Pay-in Slips (Deposits) and Noting’s in Cheque books (Withdrawals) – which are not readily available to all users and at all times or may have not been properly maintained.

Further, with the advent of multi-branch banking on account of CBS (Core Banking Solution) conversion as well as electronic banking services (Net banking, Mobile Banking, Electronic Credit Service) – even these supporting documents are now becoming extinct. For eg., The payer can directly deposit the cheque at a remote branch without mailing the cheque to the payee.

 C.        THE PROPOSED SCHEME

The Bank Statements will be more intelligible, meaningful and understandable when the narration as recorded in the said Statement properly depicts & describes the transaction i.e.,

1).        In case of Clearing / Transfer of Funds by Cheques (Domestic – Clearing or Transfer), RTGS or NEFT* and ECS Transactions

a).        A Bank Customer receiving a payment (Credit) is provided with the name of the remitter in his account statement / pass book.

b).        A Bank Customer making a payment (Debit) is provided with the name of the beneficiary in his account statement / pass book.

*          Provision already made in case of RTGS / NEFT by virtue of RBI Circular RBI/2008/09/426 dated April 8, 2009

**        In case of MICR clearing – at present, Account Name is not shared, though Account Number is shared.

***     In case of International Clearing / Transfer of Funds – not covered in this discussion paper – further inputs are required.

2).        In case of a demand draft / pay order or a like instrument

a).        A Bank customer making a payment (Debit) by a Demand Draft / Pay Order or like instrument is provided with the name of the beneficiary (in whose name the DD is issued by the Bank) and

b).        Subject, to feasibility, a bank customer receiving a payment (Credit) by a Demand Draft / Pay Order or like instrument is provided with the name of the remitter (who has sought for the issue of the DD).

3).        In case of Government Business module (GBM)

a)         Direct Tax payments – the narration is “Tax – CBDT” along with the Challan Identification Number^ (BSR Code of Branch + Date of Payment + Challan No.) is given. [OLTAS]

b)         CBEC – Customs & Excise payments – the narration is “Tax – CBEC” along with the Challan Identification Number^ (BSR Code of Branch + Date of Payment + Challan No.) is given. [EASIEST]

c)         Tax Payments to State Government – the narration is “Tax –“ & [State Name] & [tax Type] along with the appropriate equivalent of Challan No.

d)         Other business such as deposit / withdrawal from PPF, Senior Citizen Savings Scheme 2004 (SCSS) and pension payments (transfer entries to savings / current account)

i.          PPF Deposit / Withdrawal & “Account No.” of the PPF Account

ii.         SCSS Deposit / Withdrawal & “Account No.” of the SCSS Account

iii.        Pension payments – Scheme under which pension is paid or abbreviation thereof with suffix or prefix (as appropriate) – “pension”.

^          CIN or Challan Identification Number – for CBDT & CBEC – tax payments allows – the user to gather all relevant information regarding payment from the NSDL website – vis PAN / TAN or assessee code, type of payment and break-up of payment – tax, surcharge and cess, interest, penalty & other payments in addition to date of payment and challan no. – everything that is necessary to claim credit of the Tax paid

4).        Further, in case of internal transactions –Term Deposit & Term Loan Accounts – Creation, Interest and Maturity

a)         Principal is debited / credited separately from interest^&&

b)         Interest is broken up & credited separately, where it relates to different accounting years (financial year) separately. ^&&

c)         Tax Deducted at Source is debited separately & not netted up with Interest & subject to feasibility, accounting year is also mentioned.

^&&           Rationale –

1. Ease of Accounting – both at the end of the Bank & the Customer – if following accrual system of accounting.
2. At present separate certificates are required to be issued for income tax purposes – to separately depict interest and principal – for claim of housing loan deduction u/s 80C and 24(1)(b) of the Income Tax Act, 1961.
3. Ease of claim of credit of Income Tax Deducted at Source which is at present hit by Explanation to Section 194A(1) (requirement of TDS on provision for interest) – though a Contrary view expressed in IDBI v. ITO (2006) 10 SOT 197 (Mum.) and Section 199 read with 37BA(3) (TDS claim only in the year in which it forms part of income) of the Income Tax Act, 1961.

5).       Other transactions – Bank Charges & Savings Bank Interest

a)        Bank Charges (inclusive of all taxes – Service Tax & Education Cess are shown separately at present) & narrative for type – Account Maintenance, Cheques Bounce (Own or Third Party) or Failure to maintain Minimum Account Balance, etc.

b)        Savings bank interest is broken up & credited separately, where it relates to different accounting years (financial year) separately.

 D.        IMPLEMENTATION

In this regard it pertinent to note that the information – Account No., Name & KYC data of the Account Holders is available in the Core Banking System of banks & is also shared in most cases for the inter-bank transactions relating to the customers. Therefore, this scheme can be implemented by CAPTURING OF THE KYC DATA – NAME OF THE ACCOUNT HOLDER – ELECTRONICALLY along with the existing process of recording banking transactions – through software programming modifications and without manual data entry by bank staff.

1.         Regulatory Framework by the Reserve Bank of India

For implementation of the proposed scheme, the Reserve Bank of India will have to issue an appropriate Circular since it involves modification (addition) to data shared in the case of Cheque Truncation Service.

2.         Transactions Internal to the Bank

Except for clearing transactions, all other transactions are internal to the Bank or already involve the sharing of name of remitter / beneficiary (such as ECS / RTGS / NEFT) and hence can be implemented without reference to RBI or with other banks.

E.        ISSUES IN IMPLEMENTATION

1.         INTEGRATION WITH

a.         RTGS / NEFT (REAL TIME GROSS SETTLMENT / NATIONAL ELECTRONIC FUND TRANSFER)

Provision already made by virtue of RBI Circular RBI/2008/09/426 dated April 8, 2009

b.         CHEQUE TRUNCATION SERVICE (CTS)

Cheque Truncation Service (CTS) – is being used principally for inter-bank clearing of cheques.

Current Process –

1. The presenting bank (or its branch) captures the data (on the MICR band) and the images of a cheque using their Capture System (comprising of a scanner, core banking or other application) which is internal to them, and have to meet the specifications and standards prescribed for data and images.
2. The collecting bank (presenting bank) sends the data and captured images duly signed and encrypted to the central processing location (Clearing House) for onward transmission to the paying bank (destination or drawee bank).
3. The Clearing House processes the data, arrives at the settlement figure.
4. The Clearing House routes the images and requisite data to the drawee banks. (Presentation Clearing)
5. The drawee uses the images and data received from the Clearing House for payment processing and the drawee CHIs also generates the return file for unpaid instruments, if any.
6. The return file / data sent by the drawee banks are processed by the Clearing House in the return clearing session in the same way as presentation clearing and return data is provided to the presenting banks for processing.
7. The clearing cycle is treated as complete once the presentation clearing and the associated return clearing sessions are successfully processed.

Proposed Modifications in Existing Process – At present, the KYC data – Account No. & Name of the Account Holder is NOT shared with the clearing house and onward. For implementation of the proposed scheme, it is quintessential to share the KYC data – Account No. & Name of the Account Holder with the Clearing House – by the presenting bank & the drawee bank.

The following modifications will have to be made to the existing process:-

Process 2 –>    Data and image sent by the presenting bank to the Clearing House to include the KYC Data of the beneficiary (Account No. & Name).

(The data is already linked to the Cheque but is not shared)

Process 5 –>     Processing by Drawee bank, in addition to return file for unpaid instruments, if any, a return file for paid instruments is also generated and includes the KYC Data of the remitter (Account No. & Name) and transmitted onward to the Clearing House and then to the presenting bank.

(The data is already linked to the Cheque but is not shared)

The Account No. & Name of the remitter / beneficiary so transferred are captured by the Core Banking Software for the purpose of the narration in the Bank Statements.

c.         ELECTRONIC CLEARING SERVICE (ECS)

i.          According to ECS (Credit) Procedural Guidelines, 2011, the following information is already transmitted : in Credit Records – Field 6 – Destination Account Holder’s Name and in Credit Contra Records – Field 3 – User Name : to be captured as the Narration.

ii.         Similarly, according to ECS (Debit) Procedural Guidelines, 2011 the following information is already transmitted : in Debit Contra Records – Field 3 – User Name and in Debit Records – Field 6 – Destination Account Holder’s Name : to be captured as the Narration.

Since the data is already being transmitted, with changes in computer programming to capture the appropriate field for the purpose of narration – can be implemented very easily.

2.         IMPLEMENTATION WITHIN THE BANK

In case of Transfer entries – Cheque / issued of DD or PO, Government Business Module – the transactions are internal to the bank and can be implemented without the sharing of information from other banks / clearing houses.

3.       SECURITY, INTEGRITY AND CONFIDENTIALITY OF DATA

The Security, Integrity and Confidentiality of Data to be transmitted over the Clearing House Network can be assured by implementation of Public Key Infrastructure – already in use along with the Cheque Truncation Service (CTS).

4.         INFORMATION TECHNOLOGY COSTS TO BANKS / CLEARING HOUSES

The Banks / Clearing Houses will have to bear information technology cost for the update of the software to make these changes. The discussion paper does not envisage any significant additional costs of hardware except to the extent of storage of additional data to be captured / transmitted.

 F.      CHANGE IN THE PROCESS FOR CUSTOMERS

The discussion paper does not envisage any change in the existing process for customers / account holders except to the extent they get “intelligible” bank statements.

G.      CHANGE IN THE PROCESS FOR BANKS

        1.           STAFF / PERSONNEL TRAINING

The discussion paper does not envisage any change in the existing process of data entry by the Bank personnel or any additional burden of data entry to the Bank personnel because the change is automated.

2.           HARDWARE

The discussion paper does not envisage any additional requirement of Information Technology Hardware – except to the extent of any additional cost of storage of data.

3.           SOFTWARE

The discussion envisages implementation of the proposed scheme with changes / updation in the Software – Core Banking Solution (CBS) of the Banks and Clearing Houses.

H.        BENEFITS

The Banking System provides an Audit Trail but hitherto this Audit Trail is not wholly VISIBLE until the supporting documentation such as Pay-in Slips (Deposits) or Noting’s in Cheques (Withdrawals) are referred to. The Discussion paper envisages making this Audit Trail CLEARLY VISIBLE without the need to refer supporting documentation.

1.       TO CUSTOMERS

a.         Ease of tracking of funds – receipts and payments – without need to refer to supporting documentation.

b.         Ease of accounting

2.       TO BANKERS

a.         Compliance with the Banking Code and Standards – August 2009

b.         Better service to the Customers

3.       TO REGULATORY AUTHORITIES

a.         Since the Audit Trail will be clearly visible in the Bank Statements – Regulatory Authorities can keep a track of funds as well as monitor the end use of these funds. It will assist in the Prevention of Money Laundering and Investigation in Tax Evasion cases.

I           REFERENCES [External Links]

RTGS / NEFT Transactions – RBI Notification on the Website of RBI

Electronic Clearing Service ECS (Credit) Procedural Guidelines on the Website of RBI

Electronic Clearing Service ECS (Debit) Procedural Guidelines on the Website of RBI

Cheque Truncation – FAQ on the Website of RBI

Collection of Instruments – FAQ on the Website of RBI

Code of Banks (August 2009) – Website of BCSBI

OLTAS – Website of IBA

EASIEST – Website of IBA

 J        ABBREVIATIONS

BSCBI           Banking Codes and Standards Board of India

CH                 Clearing House

CHI                Clearing House Interface (CHI) – Software used by Clearing Houses (CH)

CTS               Cheque Truncation Service / Scheme

ECS               Electronic Clearing Service

FAQ               Frequently Asked Questions

MICR             Magnetic Ink Character Recognition

NEFT             National Electronic Fund Transfer

RBI                Reserve Bank of India

RTGS             Real Time Gross Settlement

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HIGHLIGHTS OF THE GUJARAT MONEY-LENDERS ACT, 2011

1.      The Act shall be applicable on the date on which the State Government will notify – which is yet to be notified.

2.      Money lending is the business of advancing loans. – Sec. 2(3)
Definition of the term “loan” is of wide import and inclusive:

Sec. 2(9) – “loan” means -     an advance whether of money or in kind at an interest
with or without security. Further, every agreement under any law for the time-being in force (whatever its terms or form may be) which is in substance or effect a  loan of money is included.

An agreement of Hire Purchase (which essentially is a Finance Lease) is in substance a loan of money and is included in the definition of the term “loan”

3. Obligations and Duties of Moneylenders

a.      Registration

b.      Renewal of Registration after every 5 years

c.       i.   Maintain Accounts – Cash Book, Ledger, Register of Debtors / Register of Securities, etc in the prescribed form

ii.  On the day of advance of loan – Deliver to the debtor
a.       A Statement showing the Name and Address of Money lender and of the debtor, date & amount of loan, date of maturity, nature of security and rate of interest.
b.       A Pass Book containing an up-to date and true account of all transactions relating to the loan.
iii.     Issue Receipt – On receipt of a payment from a debtor – or On Receipt of any security from the debtor
iv.      Every year within 30 days of the end of the year, – Issue Statement of Yearly accounts to the Debtors, every year.

All documents referred to in para C. are to be issued in local language (or if the debtor, so demands, in Hindi or English).

d.      Audit of Accounts by a Chartered Accountant.

e.       Not to dispose of any security from a debtor – before a period of two years from the date stipulated for the final repayment of the loan.

i.e, If date of loan is 1 April 2011 for 24 installments – last repayment is due on 1 April 2013 – two years after i.e., 1 April 2015 – you cannot dispose of the security.

f.       Charge Simple Interest. Interest on Interest cannot be charged.

g.       Cannot charges Expenses such as file charges, etc. Only expenses for investigating the title of the property, mortgage, stamp duty, etc. can be charged.

4. State Government will fix the Maximum rates of interest.

5. In Suits

a. Stay of suits of money lender not holding a valid registration.

b. If money-lender has not complied with the requirement of account and audit, then,
i. Interest recovery, wholly or partly, disallowed.
ii. Cancellation or suspension of registration.

c. Interest cannot be recovered in a Suit. (No court shall order/ decree recovery of sum greater than the principal of the loan due on the date of decree.)

6.      Penalties & Prosecution provided for under the act for various non-compliance.

7.      The State Government has the power to Exempt by General or Special Order – a class of Money lenders from all or any of the provisions of the Act – subject to such conditions & for such period as may be specified in the Order.

GOODS AND SERVICE TAX IN INDIA – A STUDY ON THE FIRST DISCUSSION PAPER

The First Discussion Paper on Goods and Service Tax (GST) in India envisages a Dual GST structure with defined functions and responsibilities of the Centre and States with the objective of an overall harmonious structure of rates.

Rationale for Introduction of GST

Central Indirect Taxes at present don’t extend to the entire chain of value addition especially the distributive trade below the stage of production. Further, all Central Indirect Taxes are not based on the Value Added Tax Model. Thus, invariably, there is a burden of “tax on tax” on goods and services (also referred as the ‘Cascading Effect’). The introduction of the Central GST will comprehensively include all Central Indirect Taxes and integrate taxes on Goods and Services for set-off relief. However, it will also capture the value addition in the distributive trade, hitherto exempt from Central Taxes on transactions in goods. Similarly, State level Indirect Taxes such as Entertainment Tax and Luxury Tax, etc have not been subsumed fully under the VAT, which is more of a tax on goods rather than services. Further, the burden of CST has been reduced from 4% to 2% but has not been completely phased out. CST & State Level taxes on Services such as Entertainment & Luxury Tax are not based on the Value Added Tax Model. The introduction of the State GST will comprehensively include all State level Indirect Taxes and integrate taxes on Goods and Services for set-off relief, eliminating the burden of all cascading effects including that of existing State VAT on CENVAT & Service Tax.

Notes:     i.    GST will subsume the following Central taxes and duties – Central Excise duties, Additional Excise Duties, Service Tax, The Excise duty levied under the Medicinal and Toiletries Preparation Act, Additional Duty of Customs (Commonly known as Countervailing Duty (CVD)), Special Additional Duty of Customs @ 4%, Surcharges and Cess thereon.

ii.    GST will subsume the following State taxes and duties – VAT / Sales Tax, Entertainment Tax (except levied by local bodies), Luxury Tax, Taxes on Lottery, betting and gambling, State Surcharges and Cesses to the extent on transactions on goods and services, Entry tax not in lieu of octroi.

iii.        Purchase tax though a tax on transaction in goods will not be subsumed under the GST and shall continue to be separately levied.

The GST Model

i.        Central GST to be levied by the Centre and State GST to be levied by the States. Multiple Statutes will be enacted. One at the Centre and One for each State for GST to be levied by them respectively. However, the basic features of law such as chargeability, definition of taxable event and taxable person, measure of levy including valuation provisions, basis of classification etc. would be uniform across these statutes as far as practicable. A dual GST model is required to meet the requirements of the Constitutional Division of Powers between the Centre and the States.

ii.       CGST and SGST will be applicable for all transactions in Goods and Services except to-

1. Exempted goods
2. Goods outside the purview of GST (i.e., Alcoholic Beverages, Petroleum products)
3. The transactions which are below the prescribed threshold limit (See clause vii).

iii.    CGST and SGST are to be treated as separate taxes and.

1. Cross utilisation of Input Tax Credit (ITC) not allowed between CGST and SGST of respective State except in case of Inter-State supply of Goods and Services – Free flow of tax credit at the inter and intra state level is proposed.
2. To be paid separately to accounts of the Centre and the respective State.
3. Taxpayer to maintain separate details in books of accounts for Central GST and State GST.

iv.        Credit accumulation of CGST and SGST to be limited to Exports, purchase of capital goods and input tax at higher rate than output tax, etc and refund / adjustment to be completed in a time bound manner.

 

v.         Dual Administration – Centre and State to have concurrent jurisdiction in respect of transactions in goods and services for the entire value chain and for all taxpayers on the basis of threshold limits prescribed under the respective Central and State legislation and:

a.         Tax payer to submit periodical returns to both Central and to the concerned State GST authorities (Common format, to the extent possible).

b.         Administrative functions such as Assessment, Enforcement, Scrutiny and Audit to be undertaken by the authority which is collecting the tax (that would invariably imply, both Central and State authorities).

c.         Information sharing between Centre and States and among States inter-se.

 

vi.        Uniform procedure for collection of CGST and SGST (as far as practicable).

 

vii.       Uniform SGST threshold limit across all states & UT’s of Rs. 10 lakhs for all goods and services.

 

viii.      The threshold limit in respect of CGST for goods to be Rs. 1.5 crores and for services to be appropriately high. (Not specified in the Draft Discussion Paper and at present it is 10 lakhs.)

 

ix.        The taxpayer will be provided 13 or 15 digit PAN linked Taxpayer Identification No. (TIN) to facilitate taxpayer compliance and data exchange.

 

x.         Composition scheme in respect of State GST to have an upper ceiling of Rs. 50 lakhs of Gross Annual Turnover and a floor rate of tax at 0.50% of Turnover.

Composition scheme to be optional and at the instance of the taxpayer.

 

Integrated GST on Inter-State Transactions of Goods and Services

 

i.          The Centre would levy IGST on all inter-state Transactions of Goods and Services at the rate which would be equal to CGST + SGST with appropriate provision for consignment / stock transfer of goods and services.

ii.         The Inter-State seller to pay IGST after availing Input tax credit in respect of IGST + CGST + SGST paid in respect of his purchase.

iii.        The Inter-State purchase will be allowed claim of credit of IGST while discharging output tax liability in his own state.

iv.        The Exporting State will transfer to the Central A/c, the credit of SGST used in payment of IGST.

v.         The Centre will transfer to the Importing State, the credit of IGST used in payment of SGST. Basically, under the IGST model, Tax Incidence will follow the Destination model, whereby the Tax Revenue will accrue to the state in which the goods and services are consumed. IGST model will require Computerisation of the processes of the Central and State GST authorities in respect of Inter-State transactions and also for Inter-State Dealers. IGST to be a administered in a wholly computerised environment.

 

Proposed Rate Structures of CGST and SGST

 

Whereas the exact value of the CGST and SGST rates will be contained in the appropriate legislations, the Empowered Committee has decided to adopt a two-rate structure – a lower rate for necessary items and basic items and a standard rate for goods in general. There will also be a special rate for Precious metals and a list of exempted items. Further,

i.          Exports will be Zero rated. Similar benefit to SEZ’s. No benefit to Sale from SEZ to Domestic Tariff area.

ii.         Imports
will be subject to both CGST and SGST. Tax revenue in case of SGST will accrue to the state in which the imported goods and services are consumed. CGST and SGST paid on Imported goods will also be eligible for full and complete Input tax credit (ITC).

iii.        Exemptions from GST under the Special Industrial Area Scheme will continue up to the legitimate expiry time for both Centre and States. However, the same will have to be converted to Cash Refund Schemes after collection of tax, so that the GST scheme on the basis of continuous chain of set-offs is not disturbed.

 

Tax Scenario’s

 

Scenario I
Intra-State Sale Only

Hypothetically, CGST Rate       @ 8% SGST Rate        @ 12% SGST Rate for Composition Scheme   @ 0.50%

Manufacturer ‘M’ purchases Raw Materials & Input Services for Rs. 50 + CGST + SGST (i.e., Rs. 60/-).

He then produces Finished Goods ‘F’ and sell to a wholeseller ‘W’ for Rs. 100 + CGST + SGST (i.e., Rs. 120/-) Wholeseller ‘W’ sells to

1. Retailer ‘C’ covered by the Composition Scheme.
2. Super Store ‘S’ not covered by the Composition Scheme. for Rs. 125 + CGST + SGST. Retailer ‘C’ and Super Store ‘S’ sell the finished goods ‘F’ for Rs. 180/- (M.R.P.) (inclusive of all taxes).

 

TABLE

Figures in `

Stage of Supply Chain	Manufacturer	Wholeseller	SuperStore ‘S’	Retailer ‘C’
State	Gujarat	Gujarat	Gujarat	Gujarat
Purchase Value of Inputs	50	100	125	125
Value Addition	50	25	25	NA
Transfer Value to next Stage	100	125	150	180 (Incl of Tax)
CGST Rate	8 %	8 %	8 %	Nil
Input Tax paid	4	8	10	NA
Output Tax collected	8	10	12	NA
Net CGST payable	4	2	2	NA
SGST Rate	12 %	12 %	12 %	0. 50 %
Input Tax paid	6	12	15	NA
Output Tax collected	12	15	18	NA
Net SGST payable	6	3	3	0.90 paisa

 

 

Scenario II
Inter-State Sales

Hypothetically, CGST Rate       @ 8% SGST Rate        @ 12% (same for both Rajasthan & Gujarat) SGST Rate for Composition Scheme   @ 0.50% (same for both Rajasthan & Gujarat).

Manufacturer ‘M’ purchases Raw Materials & Input Services for Rs. 50 + CGST + SGST (i.e., Rs. 60/-). He then produces Finished Goods ‘F’ and sell to a wholeseller ‘W’ for Rs. 100 + CGST + SGST (i.e., Rs. 120/-) Wholeseller ‘W’ sells to

1. Retailer ‘C’ covered by the Composition Scheme.
2. Super Store ‘S’ not covered by the Composition Scheme. for Rs. 125 + CGST + SGST (i.e., Rs. 150/-). Retailer ‘C’ and Super Store ‘S’ sell the finished goods ‘F’ for Rs. 180/- (M.R.P.) (inclusive of all taxes).

M is based in Gujarat. W, C & S are based in Rajasthan. M & W are dealing on Principal to Principal basis (i.e., No consignment or Branch Transfer).

 

TABLE

Figures in `

Stage of Supply Chain	Manufacturer	Wholeseller	SuperStore ‘S’	Retailer ‘C’
State	Gujarat	Rajasthan	Rajasthan	Rajasthan
Purchase Value of Inputs	50	100	125	125
Value Addition	50	25	25	NA
Transfer Value to next Stage	100	125	150	180 (Incl of Tax)
CGST Rate	8 %	8 %	8 %	Nil
Input Tax paid	4	8	10	NA
Output Tax collected	8	10	12	NA
Net CGST payable	4	2	2	NA
For Gujarat
SGST Rate	12 %
Input Tax paid	6
Output Tax collected	12
Net SGST payable	6 (As IGST)
For Rajasthan
SGST Rate		12 %	12 %	0. 50 %
Input Tax paid		12 (As IGST)	15	NA
Output Tax collected		15	18	NA
Net SGST payable		3	3	0.90 paisa

 

Table (Tax Collection Accounts of Centre & Respective States)

Figures in `

Centre / State	Centre*	Gujarat	Rajasthan**
IGST / SGST Collected	6	6	3
SGST Transferred to Centre	6	(6)	NA
IGST Transferred from Centre	(12)	NA	12
Accrual of Tax To	NIL	NIL	Entire Tax (15)(on Goods consumed )

 

Remarks:         Under the IGST model, Tax Incidence will follow the Destination model, whereby the Tax Revenue will accrue to the state in which the goods and services are consumed.

*                      The Centre here acts as a Clearing House.

**                    Calculations are made till the stage of Wholesale Dealer.

DEEMED DIVIDEND U/s 2(22)(e) OF THE INCOME TAX ACT, 1961

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Scope of Section 2(22)(e)::

Type of Company             :          a Closely Held Company i.e., a Company in which the public is not substantially interested.

[See Note 5 - Definition of "Company in which the public is substantially interested"]

Nature of Payments         :          (i) Any payment by way of advance or loan; OR [See Note 6]

Exception: Loan or advance is granted  [See Note 12]

1. a.             in the ordinary course of its business and [See Note 10]
2. b.             lending of money is a substantial part of the company’s business. (See Section 2(22)(e) (ii)) [See Note 11]

(ii) Any payment, on behalf of, or for the individual benefit of such Shareholder. [See Note 7]

To Person’s Covered         :                (i)             Any shareholder who is a beneficial owner of 10% or more of Voting power of the Company (but the shares shall not be entitled to a fixed rate of dividend, whether with or without a right to participate in profits); Or [See Note 9]

(ii) (a)    To a concern (includes {HUF, Firm, AOP or BOI, Company}) in which such shareholder is a partner or a member , AND;

(b)        has substantial interest (when entitled to 20% or more of the income of such concern).

Author’s Comments: The condition in clause (ii) (a) and (ii) (b) are ‘cumulative’

Amount                           :                  of Advance or Loan.

Subject to maximum of                                   Accumulated Profits (up to date of payment of Dividend). [See Note 8]

A loan not covered by Accumulated Profits is not deemed to be dividend.

Accrual                           :                   In the “previous year” in which the payment was made. {Section 8(a)} [See Note 13]

Key Points To Be Noted::

1. Purpose of Section 2(22)(e)

Section 2(22)(e) of the Income Tax Act, 1961 plainly seeks to bring within the tax net accumulated profits which are distributed by closely held companies to its shareholders in the form of loans. The purpose being that persons who manage such closely held companies should not arrange their affairs in a manner that they assist the shareholders in avoiding the payment of taxes by having companies pay or distribute, what would legitimately be dividend in the hands of shareholders, money in the form of advance or loan.

-          Read in CIT v. Raj Kumar (2009) 181 Taxmann 155 (Delhi).

2. Non-Applicability of Dividend Distribution Tax u/s 115-O of I. T. Act, 1961 & Exemption u/s 10(32):

Provisions of Corporate Dividend Tax (Section 115-O) are not attracted in case of “Deemed Dividend” & as a consequence thereof, exemption u/s 10(32) is not available. (Explanation to Chapter XII-D of the I. T. Act, 1961 – appears below Section 115-Q)

3. Heads of Income & Rate of Tax:

Deemed Dividend is taxed under the head Income from Other Sources.

No special rate of tax is applicable to deemed dividend and it is taxed as income chargeable to tax at normal rates – slab rates in case of individuals & HUF’s.

4. Set-Off To Avoid Double Taxation:

Subsequently, when the company declares dividend, & any such dividend is set-off against the advance, the dividend so adjusted against the advance (which has been deemed as dividend), will not be again treated as dividend. (See Section 2(22)(e) (iii))

5. Company in which public is substantially interested (See Section 2(18)) includes:

a.         a company owned by the Government or the RBI or more than forty percent of the shares are owned by Government or the RBI or a corporation owned by the RBI.

b.         a company registered under section 25 of the Companies Act, 1956.

c.         a company not having share capital and declared by the Board to be such company

d.         Mutual Benefit Finance Company – business of acceptance of deposits from members and notified by the Central Government u/s 620 of the Companies Act, 1956.

e.         a company, whose more than 50% Equity Shares (not being Preference Shares) held by one or more Co-operative Societies throughout the previous year.

f.          a company not being a Private Company as defined in the Companies Act, 1956, whose Equity Shares were listed on the 31 March of the previous year in a Recognised Stock Exchange.

g.         a ‘Government Company’ not being a ‘Private Company’ (both terms being defined in the Companies Act, 1956).

6.       What does not constitute a Loan or Advance?

The term “Loan or Advance” has not been defined under the Income Tax Act, 1961. Basically, the Loan or Advance must create the relationship of ‘lender’ and ‘borrower’ and not merely that of a ‘debtor’ and ‘creditor’. A relationship of ‘lender’ and ‘borrower’ will generally be created when there is an outgoing or flow of money from the company to the shareholder.

a.         In the matter of Dr. Fredie Ardheshir Mehta v. Union of India [1991] 70 Comp. Cas. 210 (Bom), Held:

Loan means an advance of money, upon the understanding that it shall be paid back, and it may or may not carry interest. A credit sale resulting in a Book Debt does not amount to a loan.

Inference –>>a.         Therefore, only an actual payment of money by the company, upon the understanding of its repayment, shall be termed as loan.

b.         Any interest on the loan, resulting in an increase in the total amount due, shall not be considered a loan for the purpose of Section 2(22)(e).

Author’s Comments: The above decision has been rendered in a Case pertaining to the Companies Act, 1956. The phrase “Loan or advance” has neither been defined under the Income Tax Act, 1961 nor the Companies Act, 1956. However, the cardinal issue in the instant case was the meaning of the term ‘Loan or Advance’, being an issue similar in context, and has been relied on by the Author.

b.         In the matter of CIT v. Raj Kumar (2009) 181 Taxmann 155 (Delhi), Held:

The usual attributes of a loan are that it involves positive act of lending coupled with the acceptance by the other side of the money as loan – it generally carries interest and there is an obligation of repayment.

The term ‘advance’ is of wide import & has undoubtedly more than one meaning, depending on the context in which it is used. In its widest meaning, the term ‘advance’ may or may not include lending or the obligation of repayment.

The Delhi High Court applied the rule of construction of noscitur a sociis – “the meaning of the word can be gathered from the context” or “by the company which it keeps.”

The word ‘advance’ which appears in the company of the word ‘loan’ could only mean such ‘advance’ which carries with it an obligation of repayment.

Trade advance which are in the nature of money transacted it give effect to a commercial transactions would not fall within the ambit of the provisions of Section 2(22)(e) of the Act.

                                    followed in:CIT v. Creative Dyeing & Printing Mills Pvt. Ltd.

c.         You may also refer toCIT v. G. Venkataraman [1975] 101 ITR 673 (Mad.).

Mere creation of debtor-creditor relationship is not enough - There should be an actual cash advance or loan from the company to the assessee and the mere creation of a debtor and creditor relationship between the company and the assessee will not be enough. There should be an outgoing or flow of money from the company to the shareholder.

d.         A similar view has been expressed in Bombay Steam Navigation Company P. Ltd. v. CIT (1965) 56 ITR 52 (SC)

“Every sale of goods on credit does not amount to a transaction of loan. A loan contracted no doubt creates a debt but there may be a debt without contracting a loan. “

e.         Inter-corporate deposits : shall not be treated as deemed dividend u/s 2(22)(e) of the I. T. Act, 1961. – per Bombay Oil Industries Ltd. v. DCIT (2009) 28 SOT 383 (Mum)

f.          Interest Provision : shall not be treated as deemed dividend u/s 2(22)(e) of the I. T. Act, per CIT, Panaji – Goa v. Parle Products Ltd. (2011) 196 Taxmann 62 (Bom.).

7.       Payments to Relatives of Shareholders or to Third Parties who advance Loans to Shareholder -

Generally speaking – Payments to relatives of shareholders or to Third parties are not covered u/s 2(22)(e).

However, in the peculiar facts & circumstances of the case, payments to relatives of Shareholders or to Third parties who, in turn use these fund to advance loans to shareholders will be covered under Section 2(22)(e) as ‘Deemed Dividend’. This is because, in addition to “Loans or Advance”, deemed dividend also includes – “Any payment, on behalf of, or for the individual benefit of such Shareholder.”

Illustrations

7.1.a.   In the matter of CIT v. L.Alagusundaram Chettiar[1977] 109 ITR 508 (Mad.),

Facts A managing director of a company, whenever he needed money used to ask an employee to take a loan from the company and the company would pass it on to the employee even without executing any pronote. The employee advanced the loan to the assessee almost immediately and in toto.

Held the loans made by the company to the employee fell in the category of “benefit” to the assessee managing director and were, therefore, assessable as deemed dividends in his hands.

7.1.b. In the matter of Nandlal Kanoria v. CIT [1980] 122 ITR 405 (Cal.), Held

Facts the assessee, having substantial interest in a company X, obtained from company Y two loans of Rs. 75,000 and Rs.2,00,000 on July 30, 1968 and September2, 1968, respectively. Y had made the loans of Rs. 75,000 to the assessee out of loans received by Y from X on the same date. Further, Y had made the loans of Rs. 2,00,000 to the assessee out of loans received by Y from X and another source on the same date.

Held this amount of Rs. 75,000 was a payment by X for the benefit of the assessee and fell within the mischief of section 2(22)(e). The same could not be said of the loan of Rs. 2,00,000, as on the date of making that loan, Y had received loans not only from X but from another source also and the loan was made out of blended amount.

8.        What is “Accumulated Profits”?

a.         In the matter of P. K. Badiani v. CIT (1976) 105 ITR 642 (SC), Held:

Accumulated profits mean commercial profits and not assessed income….It does not mean the aggregate of the assessed income arrived at after disallowing disbursements and expenditure in fact incurred..

Further, Capitalisation of accumulated profits prior to such payment of loan or advance, cannot be deemed as dividend u/s 2(22)(e).

Share Premium is not accumulated profits.

b.         Share forfeiture receipts – are not accumulated profits (Jai Kishan Dadlam (2005) 4 SOT 138 (Mum))

c.         In the matter of Navnitlal C. Jhaveri v. CIT (1971) 80 ITR 582 (Bom), Held:

While calculating accumulated profits an allowance for depreciation at the rates provided by the Income-tax Act itself has to be made by way of deduction.

d.         Further, in the matter of CIT v. G. Narasimhan (1979) 118 ITR 60 (Mad), Held:

In determining the Accumulated profits available for the purpose of section 2(22)(e), the amount treated as deemed dividend under section 2(22)(e) in past have to be excluded, irrespective of the fact that no adjustment is made in the books of accounts.

9.       What is a “Shareholder” for the purpose of Section 2(22)(e)?

*** This is point requires addition***

10.     Whether a Loan or Advance is in the “Ordinary Course of Business”?

In determination thereof, the following points have to be considered:

(a)        Whether the company is a Non-Banking Financial Company (NBFC) registered with the RBI?

(b)        Whether any Loan or Advance made to any person(s), other than Shareholder(s), Director(s) or their Relatives?

(c)        Terms ~ Rate of interest & Terms of Repayment – is it same as it is given to other borrowers.

11.      What constitutes “Substantial part of the company’s business”?

The term “substantial part of the company’s business” has not been defined under the Income Tax Act. However, the Tribunal has in Mrs. Rekha Modi v. ITO (2007) (13 SOT 512), held that the ratio of money lending business should be 20% or more to be considered “substantial part of the company’s business”.

Further, for determination of the fact whether the company was engaged in money lending business, factual position for the relevant ‘previous year’ (i.e., the year in which the loan or advance was made) should be considered.

12.     Onus is on the Assessee to prove these facts -i.e., the Loan or Advance is in the “Ordinary Course of Business” and Lending of money constitutes substantial part of the company’s business. {See Walchand & co. Ltd. V. CIT , (1975) 100 ITR 598 (Bom)}

13.      Accrual of “Deemed Dividend”

a.         “Deemed Dividend” accrues in the ‘previous year’ in which the payment was made. (Section 8(a)).

Therefore, only payment(s) made during the “current year” is covered & any outstanding balances / interest on loans are to be ignored. The assessing office may reopen assessment proceedings u/s 147, to bring “deemed dividend” escaping assessment to tax for the preceding assessment years.

Any loan(s) which were outstanding beyond the limitation period will be exempt from tax. The limitation period is period for which the assessing officer cannot issue Notice u/s 147 for reassessment of income.

b.         In CIT, Panaji – Goa v. Parle Products Ltd. (2011) 196 Taxmann 62 (Bom.), HELD:

Only that amount of loans & advances, which was actually received by the assessee by way of loan or advance during the relevant previous year, could be treated as income by way of ‘deemed dividend’ and the carried forward balance of the loan of the previous year (i.e., Opening Balance) could not be treated as deemed dividend.

14.      Deduction of Tax at Source u/s 194 -

The principal officer of an ‘Indian Company or a foreign Company which has made arrangement for payment of dividends in India’ is liable to deduct income tax u/s 194 at the rate in force, before making any payment of any sum deemed to be dividend u/s 2(22)(e) of the I. T. Act, 1961.

Further, the company may be liable to penalty u/s 271C(1)(a) of an amount equal to the ‘amount of tax which such person’ failed to deduct.

15.     Deemed Dividend in the hands of a Non-Resident Shareholder -

Section 2(22)(e) does not distinguish between a Resident or Non-resident shareholders.

Further, it is pertinent to note that by virtue of Clause (iv) sub-section (1) of section 9, “any dividend paid by an Indian company outside India” is ‘Income deemed to accrue or arise in India’.

Therefore, Deemed Dividend u/s 2(22)(e) is subject to tax in India in the hands of a Non-resident Shareholder subject to DTAA relief, if any.

16.      Deemed Dividend in case of Loan or Advance by a Foreign Company to a Resident Shareholder

Section 2(22)(e) does not distinguish between an Indian or a Foreign Company.

Sum paid by a Foreign Company to a resident shareholder has been held as deemed dividend (See Gautam Sarabhai v. CIT (1964) 52 ITR 921 (GUJ.))

17.      Reporting of Deemed Dividend by the Auditor – in case of Audit u/s 44AB of the Income Tax Act.

There is no specific provision in the Audit Report Form No. 3CD prescribed by the Income Tax Rules, 1962 for reporting of ‘Deemed Dividend’ paid by a Company. However, Clause 27 of Form No. 3CD requires the auditor to disclose whether the assessee has complied with the provisions of Chapter XVII-B relating to Deduction of Tax at Source. Since as per para 14 (supra) Tax is required to be deducted by the principal officer of an Indian Company u/s 194, the Auditor is obliged to report of Non-deduction of TDS u/s 194 in the Audit Report Form No. 3CD.

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IFRS 3 BUSINESS COMBINATIONS

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OBJECTIVE	Specify the Financial Reporting by an Entity when it undertakes a Business Combination.
CORE PRINCIPLE	All Business Combinations should be accounted by applying the PURCHASE METHOD.
SCOPE	Accounting for Business CombinationsExclusions : Formation of Joint Ventures – IAS 31 Entities under Common Control Business Combinations involving Mutual Entities Business Combination involving formation of Reporting Entity by Contract alone without – Ownership Interest. Eg. Dual Listed Corporation
Definition – Business	Integrated Set of Activities and Assets conducted & managed for the purpose of providing : a return to investors; or lower costs or other economic benefits directly and proportionately to policyholders or participants. If GOODWILL is present – Presumption as to Business.
Recognition – Acquirer’s Perspective	The Acquirer Recognises the Acquiree’s IdentifiableAssetsLiabilities (including Contingent Liabilities) At         Fair Value At         Acquisition Date. Goodwill on Acquisition is recognised and Subsequently tested for Impairment at reporting date annually rather than amortised.
Identify The Acquirer	Acquirer obtains CONTROL of the Acquiree. CONTROL – POWER to govern the FINANCIAL or OPERATING POLICIES of an Entity or Business – to obtain benefits from its activities. Presumption that Acquirer can be identified in a Business Combination.
How To Identify The Acquirer?	The Entity Acquires more than half of the other entity’s voting rights Acquires less than half of the other entity’s voting rights but Exercises– Power over half of the other Entity’s voting rights by virtue of an Agreement with other Investors; or a Statue or an Agreement Power to appoint or remove Board of Directors Power to cast majority votes at meetings of Board of Directors. Indicators – The Entity q  whose Fair Value is Higher q  making payment of Cash or Other Assets q  whose Management Dominates in the Combined Entity q  initiated the process of Business Combination Note:          New Entity is formed – Identify one of the    existing entities as the Acquirer on the previously mentioned criteria.
Measure the Cost of Business Combination	The Cost of Business Combination is++   Fair Value of Assets given++   Fair Value of Liabilities assumed ++   Fair Value of Equity instruments issued by the Acquirer ++   Directly Attributable Costs of Business Combination ++   Present Value of Deferred Consideration ++   FV of Contingent Consideration – if Adjustment is Probable and can be measured Reliably. N.B.     Fair Value (FV) is measured at Date of Exchange.
Definitions – Cost of Business  Combination	Acquisition Date	Date on which Acquirer Effectively obtains ‘Control’ of the Acquiree.
	Directly Attributable Costs	Includes – Professional fees paid to Accountants, Legal Advisors, Valuers and other Consultants to effect Business Combination.Excludes – General Administration Costs, etc. not specifically linked to a Business Combination
	Fair Value	The amount for which an asset could be exchanged or a liability settled, between knowledgeable, willing parties in an arm length’s transaction.
Allocate the Cost to Assets, Liabilities on Acquisition Date	Recognises the Acquiree’s IdentifiableAssetsLiabilities (including Contingent Liabilities) At         Fair Value At         Acquisition Date. Exception :: Non-current Assets (or Disposal Groups) that are classified as Held for Sale as per IFRS 5 shall be recognised At Fair Value Less Costs to Sell.
RECOGNITION CRITERIA – ASSETS AND LIABILITIES OF ACQUIREE	Assets other than Intangible Assets Probable flow of F.E.B. to Acquirer Fair Value can be measured Reliably Liability Probable outflow of F.E.B. to settle the obligation Fair Value can be measured Reliably Contingent Liability and Intangible Assets Fair Value can be measured reliably.
Recognition Of Income Of Acquiree	Profits / Losses of Acquiree shall be Incorporated after the Date of Acquisition.Profits / Losses shall be Based on the Cost of Business Combination to the Acquirer.
Recognition Of Goodwill	q  Cost of Business Combination > Fair Value of Assets, Liabilities & Contingent Liabilities acquiredq  Recognise Difference as GOODWILL as Assetq  Initial Measurement At Cost. q  Subsequent Measurement – Cost less Accumulated Impairment loss (if any) q  Goodwill – payment for F.E.B. from assets not capable of being individually identified and separately recognised. q  No Amortisation – Test for impairment annually or more frequently – if events indicate Impairment (IAS 36).
Bargain Purchase	q  Cost of Business Combination < Fair Value of Assets, Liabilities & Contingent Liabilities acquired.q  Reassess the identification & measurement of Acquiree’s identifiable Assets, Liabilities, and Contingent Liabilities and the measurement of Cost of Business Combination.q  Recognise in P & L – any excess remaining after that reassessment.
Disclosure – By Acquirer	Information that enable the users of Financial Statements evaluate:-q  The Nature and Financial Effect of Business Combination effectedq  during the period; and q  after the Balance sheet date but before the Financial Statements are authorised for issue. q  The Financial Effect of Gains, Losses, Error Corrections and other adjustments recognised in current period that relate to Business Combination effected in Current or Prior periods.

IFRS 8 OPERATING SEGMENTS

IFRS 8 Operating Segments [Download this PPT as PDF File]

THE CORE PRINCIPLE

An entity shall DISCLOSE information to enable users of its financial statements  to EVALUATE The nature and financial effects of the BUSINESS ACTIVITIES in which it engages & the ECONOMIC ENVIRONMENT in which it operates.

IFRS 8 – APPLICATION SUMMARY

•1 •Identify the CODM

•2 •Identify the Operating Segments

•3 •Determine the Reportable Segments

•4 •Disclose the Required Information

IDENTIFY The Chief Operating Decision Maker (CODM)

CODM is a FUNCTION, not a DESIGNATION. CODM can be an INDIVIDUAL or a GROUP of Individuals. CODM FUNCTION is to Allocates the Resources of the Entity  and Assess the performance of the Operating Segments of the Entity.

Operating Segments is a Component of an Entity.

•From which it MAY EARN REVENUES and INCUR EXPENSES (including Intra-Group Revenue and Expenses)

•Whose operating results are REVIEWED regularly by the Entity’s CODM – to assess performance and decide about resource allocation.

•For which DISCRETE Financial Information is available

Specific Example

Yes – Startup Operations – before Earning Revenues

No – Corporate HQ’s and Functional Departments (say Internal Audit) not earning Revenues  & Post-Employment Benefits Plans

Determining Reportable Segments

AGGREGATION CRITERIA

Ø Aggregation is consistent with the Core Principle

Ø Segments have similar economic characteristics

Ø Segments similar on each of the Five Specified Criteria

1. Nature of Products and Services

2. Nature of the Production Processes

3. Customer type or class

4. Distribution Methods

5. Nature of Regulatory Environment

Quantitative Thresholds

A Segment is REPORTABLE if MAJORITY of its REVENUE is from Sales to External Customers.

• Segment Revenue > 10% of Revenue from all Segments (Revenue = External + Internal)

• Segment Results > 10% of the Combined Results

• Segments Assets > 10% of the Total assets of all Segments

Determining Reportable Segments

•Identify each Operating Segment that exceed the Quantitative Threshold

•Aggregate

•any operating segments that meet all aggregation criteria

•Remaining operating segments below Quantitative threshold with each other if the majority of aggregation criteria met

•If Reportable Segments are less than 75% of Revenue, add more reportable segments.

SEGMENTS NOT MEETING THE QUANTITATIVE THRESHOLD
Management BELIEVEs that the Information is Useful for the Users	Can be disclosed
in Current Year but was disclosed in Preceding Period	Can be disclosed if the Management judges that the Information is of Continuing Significance
SEGMENTS MEETING THE QUANTITATIVE THRESHOLD
in Current Year but was Not disclosed in Preceding Period	Disclose Restate prior period information (unless the necessary information is not available and cost to develop it would be excessive)

DISCLOSURE

An entity shall DISCLOSE information to enable users of its financial statements  to EVALUATE The nature and financial effects of the BUSINESS ACTIVITIES in which it engages & the ECONOMIC ENVIRONMENT in which it operates.

What is This Information ?

An Entity shall disclose the following for each period for which a Statement of Comprehensive Income is presented: a. General Information b. Information about Segment Revenues, Segment Profit or Loss and Segment Assets and Liabilities and basis of Measurement. c. Reconciliation Statement

Disclosure – general information a. Factors used to IDENTIFY the Entity’s Reportable Segments (viz., Nature of Products & Services, Nature of Production & Distribution Processes, Geographical Areas, Regulatory Environment, or a Combination of these Factors). b. The Types of Products and Services from which each Reportable Segment derives its Revenue.

Disclosure – information about Segment (revenues, p & l and assets & liabilities) For each Reporting Segment, Entity shall report :

Ø Segment Profit or Loss

Ø Total Segment Assets

Ø Segment Liabilities (if reviewed by CODM)

For each Reporting Segment, Entity shall report (if reviewed by CODM or otherwise Information is provided to CODM, even if not included in measure of P & L)  :

Ø Revenues from External Customers

Ø Revenue from Intra-Group Transactions with Other Operating Segments

Ø Interest Revenue & Interest Expenses (separately)

Ø Depreciation and Amortisation

Ø Material Items of Income and Expenses

Ø Entity’s interest in P&L of Associates / JV accounted for under the Equity Method

ØIncome tax expense

Ø Material non-cash items other than Depreciation & Amortisation.

Disclosure – Reconciliation

Total of Reportable Segments

^ Revenues to Entity’s Revenue

^ P & L to Entity’s P & L

^ Assets to Entity’s Assets

^ Liabilities to Entity’s Liabilities (if Reported)

^ Amounts for Every Material Item of Information disclosed to corresponding amount for the entity.

Entity Wide Disclosures

All entities subject to this IFRS including Entities that have a single reporting segment shall provide Information about ::

* Products and Services

* Geographical Areas

* Major Customers

The amounts reported shall be based on the financial information that is used to produce the entity’s financial statements. If Any Information is Not Available and Cost to develop it would be excessive, the fact should be disclosed.

Information About Products & Services

Revenues from External Customers for each product & services (or group of products and services).

Information About Geographical Areas

* Revenues from External Customers &

* Non-current Assets (other than Financial Instruments, Deferred Tax Assets and Rights under Insurance Contracts)

i.     Attributed to the Entity’s country of Domicile

ii.     Attributed to the all Foreign Countries from which the Entity derives Revenue or holds Assets. If revenues from External Customers or Assets attributed to an Individual Foreign Country are Material, the same shall be disclosed separately.

Information About Major Customers

# Extent of its Reliance on Major Customers

# If Revenues from transaction with single external customer amount to 10% or more of the Entity’s Revenue, the Entity shall Disclose:

Ø the Fact;

Ø the total amount of Revenues from each such Customer;

Ø the Identity of the Segment(s) reporting such Revenue

Ø Need NOT Disclose – Identity of the Customer A group of Entities known to the Reporting Entity to be under common control shall be considered a single customer.

Government (and entities known to the Reporting Entity to be under the control of that Government shall be considered a single customer.

INTRODUCTION TO LIMITED LIABILITY PARTNERSHIP IN INDIA

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The framework of laws & rules dealing with the Limited Liability Partnership (LLP) are contained in the Limited Liability Partnership Act, 2008 (the LLP Act) and the Limited Liability Rules, 2009 (the LLP rules). The Income Tax Act, 1961 was amended by the Finance Act, 2008 and the Finance Act, 2010 to provide for the framework of Taxation of LLP’s.

The Salient Features of a Limited Liability Partnership (LLP) are :-

PARTICULARS		PARTNERSHIP FIRM		LIMITED LIABILITY PARTNERSHIP	PRIVATE LIMITED COMPANY
Statute		The Indian Partnership Act, 1932		The Limited Liability Partnership Act, 2008	The Companies Act, 1956
Regulated by		Registrar of Firms under the State Government		Registrar of Companies under the Central Government	Registrar of Companies under the Central Government
Registration Formalities		Not Compulsory.		Compulsory.	Compulsory.
Incorporation Document		Partnership Deed		Limited Liability Partnership Agreement	Memorandum of Association (MoA) & Articles of Association (AoA)
Change of Registered Office from one State to another		Allowed		Allowed – Minimum formalities	Allowed – Lot of formalities to be followed.
No. of Participants –Minimum Maximum		Two (2) Twenty (20)		Two (2) Not specified	Two (2) Fifty (50) excluding past & present employees
Maintenance of Accounts & Audit		As per the Partnership Deed.		Accounts are required to be maintained. Audit if turnover exceeds Rs. 40 lakhs.	Compulsory maintenance of accounts and audit.
Filing of Annual Return – Account, etc.		Not required		Yes.	Yes.
Liability of Participants		Unlimited, in all cases		Limited to Capital Contribution, except in case of deliberate fraud	Limited to Capital of the Company.
Admission of Minor as participant.		Minor can be admitted to the benefits of the partnership.		Minor cannot be a partner in a LLP.	Legal Guardian can hold the shares of the company on behalf of the Minor.
Separate Legal Entity		No.		Yes. Formed as Body Corporate	Yes. Formed as Body Corporate
Common Seal		No common seal		Optional	Compulsory
Perpetual Existence		No.		Yes. Subject to Dissolution & Winding up	Yes. Subject to Dissolution & Winding up
Suits against & by		A Registered Firm can sue & be sued in its own name.		A LLP shall always sue & be sued in its own name.	A Pvt Ltd Company shall always sue & be sued in its own name
Management		By Partners. Working Partners Minimum 1		Designated Partners Minimum 2	Board of Directors Minimum 2
Taxation
a.   of Income of the Entity		Assessed as a separate & distinct entity under the Income Tax Act, 1961.		Assessed as a separate & distinct entity under the Income Tax Act, 1961.	Assessed as a separate & distinct entity under the Income Tax Act, 1961.
b.   Interest on Capital contribution by participants		Allowable as deduction in the hands of Registered Firm subject to limits.		Allowable as deduction in the hands of LLP subject to limits.	Not Allowed as a deduction.
c.   Management Remuneration		Allowable as deduction in the hands of Registered Firm subject to limits.		Allowable as deduction in the hands of LLP subject to limits.	Allowable as deduction in the hands of Private Company. No limits.
d.  Distribution of Profits		No tax to be paid by the Partnership on distribution. Exempt in the hands of the partners.		No tax to be paid by the LLP on distribution. Exempt in the hands of the partners.	Private Company to pay Dividend Distribution Tax on dividends. Exempt in the hands of the shareholders.
e.   Loans & Advances by the Entity to participants		Not Taxable		Not Taxable. Except in case of Private Company converted into LLP – for the first three years after conversion	Taxable as deemed dividend u/s 2(22)(e), if certain conditions are met.

(## – External Links Below::)

Download – Limited Liability Partnership Act, 2008 – Limited Liability Partnership Rules, 2009

Visit - e-Governance Website for Filing of LLP Forms

FAIR VALUE OF SECURITY DEPOSIT UNDER IAS 39

IAS 39 defines a Loans and receivable as ”non-derivative financial assets with fixed or determinable payments that are not quoted in an active market”

Security Deposits without Fixed Maturity such as Deposit with Regulatory Authorities such as Taxation – Indirect, as well as Public Utility Services such as providers of Telephone, Mobile, Electricity, Gas, etc would be comprised in the category – Loans and Receivable – they are

• non-derivative,
• have fixed or determinable payments,
• are not quoted in active market, &
• generally have no fixed maturity.

If Security Deposits have a fixed maturity (defined refund period) then they would normally be classified as HTM (Held To Maturity) Investments subject to meeting condition of Management Intent and Ability.

Security Deposits paid to Public Utility Service providers or any private party are definitely ‘Contractual Rights / Obligations’. though I cannot commit myself on this point so far as Deposit with regulatory authorities are concerned.

In case of a Security Deposit – cash is generally refunded after termination of the contract, therefore, it is a contractual right to receive cash and therefore it is a Financial Asset

Therefore, Security Deposits paid to Public Utility Services should be definitely categorised as “Loans & Receivables“.

Initial Recognition of Financial Assets is at Fair Value of Consideration given or paid + Transaction Costs

Subsequent Measurement of Loans and receivable is at Amortised Cost using the Effective Interest Method.

Amortised Cost = Initial Recognition Amount – (Principal Repayments) ‘+/-’ (Difference in Initial Recognition and Maturity Value) – Impairment Reduction.

Suppose, Security deposit is Rs. 5000/-, transaction costs is Rs. 50/- and maturity is also Rs. 5000/-

Fair Value at initial recognition is Rs. 5000/- + 50/- = 5050/-

then Amortised cost = 5050 – Nil – (5050-5000) or (50) – Nil

= 5050 – Nil – 50 – Nil

= 5000

therefore, effectively Security Deposits for contractual obligations will stand in the Balance Sheet at the amount receivable on the termination of the contract and which will generally be equal to the amount paid.

HEDGE ACCOUNTING UNDER IAS 39

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OBJECTIVE Hedge Accounting seeks to ELIMINATE these Accounting Mismatch.

CORE PRINCIPLE It recognises the OFFSETTING EFFECTS on P & L of Changes in Fair Value of the Hedging Instrument and the Hedged Item.

KEY TERMS DEFINED

Hedged Item	an Asset, Liability, Firm Commitment, Highly probable forecast transaction or Net Investment in Foreign Operation THAT: (a) Exposes the entity to RISK of changes in Fair Value or Cash Flows and (b) is DESIGNATED as being hedged.
Hedging Instrument	is DESIGNATED (a) a Derivative or (b) a Non-Derivative FA or FL (for a hedge of risk of changes in foreign currency rates only) – whose Fair Value or Cash Flows are expected to offset changes in Fair Value or Cash Flows of a Designated Hedged Item.
Hedge Effectiveness	the DEGREE to which changes in Fair Value or Cash Flows of the Designated Hedged Item Attributable to Hedged Risk are to offset by changes in Fair Value or Cash Flows of a Designated Hedged Instrument.
Firm Commitment	Binding Agreement – to Exchange – Specified Resource – Specified Price – Specified Future Date(s).
Forecast Transaction	An uncommitted but Anticipated Future transaction.

Examples of Hedging Instrument – Purchased Options; An HTM Investment for Foreign Currency Risk

Not a Hedging Instrument – Written Options; Entity’s own equity instruments; AFS Investment in Unquoted Equity Share not carried at Fair Value; Stock Index

Examples of Hedged Item – An Exposure to a risk that affects the Income Statement; An AFS Security; A Loan / Receivable; Foreign currency monetary item

Not a Hedged Item – A HTM Investment for interest rate risk; An Investment in Associate or Subsidiary; Non financial asset or Liability; A general business Risk; Derivative

Types of Risk which can be Hedged

• Forex
• Credit
• Equity
• Interest
• Commodity

Exposure to these Risk can arise from changes in

• Fair Value
• Cash Flows
• Probable Future Cash Flows

IAS 39 recognises 3 types of Hedge Relationship

I.    Fair Value Hedge

• Fair value hedges
  
  • Hedge of exposure to changes in fair value of a recognised asset or liability; an unrecognised firm commitment; or an identified portion of any of the above two;
  • that is attributable to a particular risk; and
  • would affect P&L.

II.    Cash Flow Hedge

• Cash flow hedges
  

Hedge of exposure to variability in cash flows that is:

• attributable to a particular risk associated with a recognised asset or liability or a highly probable forecast transaction (also an inter-company one); and
• would affect P&L.

III.    Hedge of Net Investment in Foreign Operation

• Hedge of a Net Investment in Foreign Operation
  
  • The Net Investment in Foreign Operation is the amount of a reporting entity’s interest in the net assets of that operation.

CONDITIONS FOR HEDGE ACCOUNTING

• Formal Documentation at Inception
  • Entity’s Risk Management Objective and Strategy
  • Formal Designation of Hedging Relationship by Identification of
    • Hedging Instrument
    • Related Hedged Item or Transaction
    • Nature of Risk being Hedged
    • How the Entity will assess the Hedging Instrument’s EFFECTIVENESS.
• Hedge Effectiveness –

  The Hedge should be expected to be Highly Effective in achieving Offsetting Changes in Fair Value or Cash Flow attributable to the Hedged Risk – At Inception and subsequent periods.
  
  

• Hedge Effectiveness – can be Reliably measured.

HEDGE ACCOUNTING – FAIR VALUE HEDGE

*     MEASUREMENT MISMATCH

• Fair value hedges
  

Hedge of exposure to changes in fair value of a recognised asset or liability; an unrecognised firm commitment; or an identified portion of any of the above two;

• that is attributable to a particular risk; and
• would affect P&L.

  		Measurement of Hedged Item	Measurement of Hedging Instrument
  Without Hedge Accounting		At Amortised Cost Or At Fair Value through Equity (OCI)	At Fair Value through P & L.
  With Hedge Accounting		Adjust the Carrying Amount to Fair Value through P & L.	At Fair Value through P & L.

  

  
  

MECHANICS OF FAIR VALUE HEDGE

HEDGE ACCOUNTING – CASH FLOW HEDGE

*     RECOGNITION MISMATCH

Hedge of exposure to variability in cash flows that is:

• attributable to a particular risk associated with a recognised asset or liability or a highly probable forecast transaction (also an inter-company one); and
• would affect P&L.

MECHANICS

MECHANICS

DISCONTINUATION OF HEDGE ACCOUNTING

• Prospective Discontinuation IF::
  • Hedging Instrument expires, is sold, terminated or exercised.
  • Hedge no longer meets the criteria for Hedge Accounting.
  • The entity revokes the Designation.
• On Discontinuation

  

DEDUCTION UNDER SECTION 80IE – AN OPPORTUNITY

RELEVANT PROVISIONS
Sl. No.	Criteria	Conditions
1.	NATURE OF BUSINESS	(a) Manufacture or produce an eligible articles or thing; or (b) Undertakes Substantial Expansion to manufacture or produce eligible articles or thing; and (c) Carries on ‘eligible business’
2.	COMMENCEMENT OF BUSINESS	Between – 1 April 2007 To 31 March 2017
3.	LOCATION OF UNDERTAKING	NORTH-EASTERN STATES being the states of Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim & Tripura.
4.	RESTRICTIONS	(a) Should not be formed by SPLITTING UP, or the  RECONSTRUCTION of a business already in existence; or (b) Not formed by TRANSFER of Plant & Machinery used for any purpose. However, if any ‘second-hand’ Plant & Machinery, used outside India by any person other than the assessee, & imported into India, shall not be regarded as Transfer of Plant & Machinery. Further, where, the total value of the Plant & Machinery, transferred does not exceed 20% of the Total Value of Plant & Machinery used in the Business, the above condition is deemed to be complied with.
5.	SEPARATE ACCOUNTS & AUDIT	Separate Accounts are required for Eligible Business. Accounts are required to be Audited by a Chartered Accountant. To furnish Audit Report in Form No. 10CCB, alongwith Return of Income.
6.	RELATED PARTY TRANSACTIONS	POWER OF AO TO RECOMPUTE PROFITS: Transfer of any goods or services held for the purpose of any other business to the eligible Business other than Fair Market Value (FMV). Owing to close connection between the assessee & any other person, the course of business is so Arranged that the business between them produces more than ‘ordinary profits.’
7.	AMOUNT OF DEDUCTION	100% of the Profits & Gains DERIVED from such business
8.	PERIOD OF DEDUCTION	10 Consecutive Assessment Years Commencing with the Assessment Year in which the undertaking begins to Manufacture or Produce Articles or Things, or Completes Substantial Expansion.
TAX PLANNING
1.	RECOMMENDED BUSINESS ORGANISATION [STATUS]	1ST Preference Partnership Firm No provision for Interest on Capital & Remuneration To Working Partners 2ND Preference Company – considering Capital Requirements. 3RD Preference Sole Proprietorship – Only if Capital Requirements can be met by Proprietor without borrowings from Related Parties.

INTERPRETATION

“Eligible Articles or Things” include any article or thing, excluding – Tobacco & Manufactured Tobacco Substitutes, Pan Masala, Plastic Carry Bags (Less than 20 Microns), & Certain Goods produced by Petroleum Oil or Gas Refineries.

“Eligible Business” includes – Hotel (Not Below 2 Star Category), Adventure & Leisure Sports including Ropeways, Nursing Homes (Minimum 25 Beds), Old-age Home, Information Technology related Training Center, Manufacturing Information Technology related Hardware, and Vocational Training Institute (Hotel Management, Food Craft, Entrepreneurship Development, Nursing & Para Medical, Civil Aviation & Fashion Design & Industrial Training.

“Substantial Expansion” means investment in the plant & machinery by at least 25% of the book value of plant & machinery (before taking depreciation in any year), as on the 1st Day of the year in which Substantial Expansion takes place.

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CHARGE OF INTEREST UNDER INCOME TAX ACT, 1961 (DRAFT)

1.       General Principle

The Supreme Court in the matter of Sandvik Asia Ltd. v. CIT, Pune [2006] 150 Taxman 591 (SC)

“24. In our view, the Act recognizes the principle that a person should only be taxed in accordance with law and hence where excess amounts of tax are collected from an assessee or any amounts are wrongfully withheld from an assessee without authority of law the revenue must compensate the assessee.”

2.      Provisions under the Income Tax Act, 1961 – Interest Payable by the Assessee

PARTICULARS	234A	234B	234C	234D	220(2)
SECTION
NATURE OF DEFAULT	DELAY OR DEFAULT IN FILING RETURN OF INCOME U/S 139(1) OR U/S 142(1)	DEFAULT IN PAYMENT OF ADVANCE TAX	DEFEREMENT OF ADVANCE TAX	EXCESS REFUND	DELAY IN PAYMENT OF AMOUNT SPECIFIED IN NOTICE OF DEMAND
APPLICABILITY	Return of income of assesseeA)      is furnished after the due date of filing return orB)      is not furnished.	Assessee liable to pay Advance Tax hasA)      not paid orB)      paid less than 90% of Assessed tax	Assessee liable to pay Advance Tax hasA)     not paidB)     short paid any instalments within the due date of payment of such tax.	Any refund is granted to the assessee u/s 143(1) –A)     No refund is due on regular assessment;B)     The amount refunded exceeds the amount of refund due on regular assessment	The amount specified in notice of demand is  -not paid within the period limited u/s 220(1) – usually 30 days from the service of notice u/s 156.
AMOUNT	Assessed Tax as reduced by TDS, TCS, Advance Tax and Self-Assessment tax paid before the due date of filing return u/s 139(1) and Tax relief u/s 90, 90A and 91 and MAT credit allowable u/s 115JAA.	Assessed Tax as reduced by TDS, TCS, Advance Tax and Tax relief u/s 90, 90A and 91 and MAT credit allowable u/s 115JAA.	Instalments of Advance Tax u/s 208 as reduced by the amount paid determined on returned income.	The whole or excess amount of refund	The amount specified in notice of demand.
PERIOD – COMMENCING ON	the Due Date of filing return u/s 139(1)	the 1st day of April of the year immediately following the ‘previous year’	In case of Corporate assessees-3 Months for First, Second & Third Installments;1 Month for Last Installment In case of Non-Corporate assessees – 3 Months for First & Second Installment 1 Month for Last Installment	The Date of grant of refund	The Date of payment specified in the Notice of Demand
PERIOD – ENDING ON	the Date of Filing return; orwhere no return is furnished – the date of completion of assessment u/s 144.	the Date of determination of total income u/s 143(1) / 143(2) /144.However, relief u/s 234B(2) is provided in respect of tax paid u/s 140A (Self Assessment Tax), in which case – the period will end on the Date of payment of tax – to the extent of amount paid.		The Date of regular assessment	The Actual Date of payment.
RATE OF INTEREST	simple interest @ 1.00 % per month or part thereof	simple interest @ 1.00 % per month or part thereof	simple interest @ 1.00 % per month or part thereof	simple interest @ 0.05 % per month or part thereof	simple interest @ 1.00 % per month or part thereof